Question Details

The adjustment responsibilities referred to are that surplus and deficit countries must 



1. "While the table shows that there are more countries against which the U.S. dollar has appreciated over the past 12 months rather than depreciated, the extra local currency that a fixed U.S. dollar outlay will buy is not necessarily a great windfall to the U.S. traveler." The U.S. traveler may not find this to be a windfall because it has been offset by 
a) capital inflows b) tax differences c) higher foreign prices 
d) direct intervention by the central bank in the foreign exchange market 
2. "Word that growth in the cost of living was slower in the United States than in Germany last year attracted buyers for the ......" This clipping is best completed with 124 
a) U.S. dollar because PPP predicts that the U.S. dollar should rise 
b) German mark because PPP predicts that the German mark should rise 
c) U.S. dollar because relatively lower prices in the U.S. should create a U.S. balance of payments deficit 
d) German mark because relatively higher prices in Germany should create a German balance of payments surplus 
3. "The conventional wisdom has been that inflation is bad for the economy. If our inflation is running higher than our trading partners' inflation, according to this argument, our growth slows and jobs are lost." Does this logic assume a fixed or flexible exchange rate? 
a) fixed - our balance of payments surplus makes exports more difficult 
b) fixed - our money supply is automatically contracted, causing unemployment 
c) flexible - central bank intervention in the foreign exchange market inhibits exports 
d) flexible - our exchange rate automatically increases, decreasing exports, causing unemployment 
4. "Monday's trade figures - twice as bad as analysts were generally expecting them to be - reinforced fears that the economy was overheating, with imports outstripping exports and inflationary pressures surging. The government is now expected to raise interest rates almost immediately." Higher interest rates are appropriate because they 
a) lower the exchange rate b) raise costs and so cut back demand 
c) dampen aggregate demand directly and through raising the exchange rate 
d) attract capital inflows, increasing aggregate supply to alleviate the inflation 
"Foreign countries are now free to pursue an independent course of monetary policy, and old conflicts about the U.S. role in exporting inflation and about the adjustment responsibilities of surplus (or deficit) nations suddenly seem to have lost their relevance." 
5. U.S. inflation would be exported if 
a) the exchange rate were fixed b) it charged more for its exports 
c) the exchange rate were flexible d) it increased its money growth rate 
6. The adjustment responsibilities referred to are that surplus and deficit countries must 
a) both experience inflation b) both experience unemployment 
c) experience inflation and unemployment, respectively 
d) experience unemployment and inflation, respectively



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